For companies preparing to go public, the process is as much about proving what the business is not than it is about proving what the business is.
That’s been the case for cloud-storage firm Dropbox Inc. DBX, +0.00% which officially filed for an initial public offering Friday. Investors, burned by recent hot tech IPOs including those of Snap Inc. SNAP, -2.06% and Blue Apron Holdings Inc. APRN, -4.19% were quick to look for ways that Dropbox was both similar to and different from other big tech names, and Dropbox tried to point them in a preferred direction.
In discussing competitors, for instance, Dropbox told investors it was only a little bit like Box Inc. BOX, +2.49% a slower-growing provider of cloud-storage solutions. Meanwhile, the company said that its business was similar to that of Atlassian Corp. TEAM, -0.94% , which makes a number of tools for business collaboration, as well as parts of Apple Inc. AAPL, +1.98% Alphabet Inc. GOOGL, +1.38% and Amazon.com Inc. AMZN, +1.46% which all offer storage to users.
Dropbox unveiled a voting structure for its various share classes that was not as extreme as the non-voting shares sold by Snap a year earlier, and the company highlighted its positive free cash flow and net-cash balance, two things that can be rare for companies in the process of an IPO.
Dropbox—which has raised more than $600 million in private investment and was valued at $10 billion in its most recent venture round four years ago, according to The Wall Street Journal—estimated that it would seek to raise $500 million in the offering, though that figure is typically a placeholder that will be updated in later filings. The company, which was founded in 2007, plans to list on the Nasdaq exchange under the ticker symbol DBX, and Goldman Sachs and J.P. Morgan are listed as lead underwriters among 12 banks named.
Here are the highlights from Dropbox’s filing.
How Dropbox makes money
Though the majority of Dropbox’s customers don’t pay for file storage, the company says that it has more than 11 million paying users out of more than 500 million registered users. The paying users include individuals who have upgraded their accounts as well as corporate users. The company says that Dropbox Basic, the free version available to individual users, “serves as a major funnel for conversions to our paid subscription plans.”
IPOs in 2018: Here are six tech companies that could go public
The company doesn’t spend a lot of money on sales teams: More than 90% of revenue comes from “self-serve channels,” meaning users who buy a subscription via the company’s app or website, according to the company’s prospectus. The majority of individual users store work files on the service, which Dropbox believes can be an opportunity to get more business-team users.
Dropbox generated $1.1 billion in revenue during 2017, up from $845 million in 2016 and $604 million in 2015. “Our revenue growth rate has declined in recent periods and may continue to slow in the future,” the company said in its prospectus, citing competitive pressures as well as its higher market penetration.
How Dropbox loses money
Dropbox posted a slimmer loss in 2017 than it did in the prior two years, posting a $112 million net loss compared with $210 million in 2016 and $326 million in 2015.
That’s not to say that the pattern is poised to continue, however. Dropbox plans to increase research-and-development expenses and bulk up its “technical infrastructure.” The company is also hiring new employees to work on engineering, product and design.
How Dropbox stacks up with the competition
Dropbox admits that there are a number of major players that also offer products in cloud storage and “content collaboration.” These include Apple, Amazon.com, Alphabet, Microsoft Corp. MSFT, +1.45% and Atlassian. Those large players “benefit from competitive advantages over us,” Dropbox said in its prospectus, including greater name recognition, sizable existing user bases, and greater financial resources.
Of course, there’s also Box, which does enterprise storage for businesses. One might think that given the name and the line of work, Box makes for a good comparison to Dropbox. Dropbox, though, is trying to distance itself from Box, which makes about half as much revenue and is growing more slowly. Box also trades at a discount to many software-as-a-service peers. Dropbox said it competes with Box “on a more limited basis” when it comes to “the cloud storage market for deployments by large enterprises.”
The company would rather you compare it to Atlassian, which makes collaboration products such as Jira and Trello that serve teams of employees. Atlassian is growing more quickly than Box and its shares command a higher multiple on the basis of enterprise value to sales.
Whereas Snap is burning cash, Dropbox is free-cash positive, with its net-cash balance and free cash flow growing in the most recent period. Dropbox said it generated $305 million in free cash flow during 2017, up from $137 million in 2016 and negative free cash flow of $64 million in 2015, thanks to decreases in capital expenditures and strong revenue growth. The company believes that the cash on its balance sheet, in addition to its existing credit and its cash-flow potential, “will be sufficient to meet our cash needs for the foreseeable future.”
Plenty of restricted stock
As is the norm for tech companies going public these days, Dropbox has multiple classes of shares with different voting rights. Class A shares have 1 vote, Class B shares have 10 votes, and Class C shares are nonvoting. MarketWatch pointed out last week that Dropbox’s structure still gives heavy voting power to the founders and key investors, but it’s “slightly” better than the one rolled out by Snap a year ago, in which ordinary investors don’t get any voting rights.
Co-founder and Chief Executive Drew Houston owns 38.3% of the class A shares and 24.3% of the Class B shares, for 24.4% of the total voting power. Venture-capital firm Sequoia Capital actually has more power than Houston, with 25% of the Class B shares and 24.8% of total voting power. Co-founder Arash Ferdowski has 9.9% total voting power, mainly consisting of Class B shares.